UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2004

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-12507

ARROW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

New York

22-2448962

(State or other jurisdiction of

(IRS Employer Identification

incorporation or organization)

Number)

250 GLEN STREET, GLENS FALLS, NEW YORK 12801

(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:   (518) 745-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2)  has been subject to such filing requirements for the past 90 days.

Yes    X        No        

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes    X        No        

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

Outstanding as of July 30, 2004

Common Stock, par value $1.00 per share

9,806,947

PART I

FINANCIAL INFORMATION

Page

Item 1.

Financial Statements:

Consolidated Balance Sheets

    as of June 30, 2004 and December 31, 2003

3

Consolidated Statements of Income

    for the Three Month and Six Month Periods Ended June 30, 2004 and 2003

4

Consolidated Statements of Changes in Shareholders’ Equity

    for the Six Month Periods Ended June 30, 2004 and 2003

5

Consolidated Statements of Cash Flows

    for the Six Month Periods Ended June 30, 2004 and 2003

7

Notes to Unaudited Consolidated Interim Financial Statements

8

Independent Auditors’ Review Report

11

Item 2.

Management's Discussion and Analysis of

   Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

38

PART II

OTHER INFORMATION

Item 1

Legal Proceedings

38

Item 2

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

38

Item 3

Defaults Upon Senior Securities

38

Item 4

Submission of Matters to a Vote of Security Holders

39

Item 5

Other Information

39

Item 6

Exhibits and Reports on Form 8-K

39

SIGNATURES

39

June 30,

2004   

December 31,

2003      

ASSETS

Cash and Due from Banks

$             28,641

$             27,526

Federal Funds Sold

                                  ---

                     5,800

  Cash and Cash Equivalents

                28,641

                 33,326

Securities Available-for-Sale

343,374

349,831

Securities Held-to-Maturity  (Approximate Fair

   Value of $109,888 at June 30, 2004 and $110,341 at December 31, 2003)

108,047

105,776

Loans

866,127

855,178

  Allowance for Loan Losses

             (11,984)

              (11,842)

     Net Loans

           854,143

            843,336

Premises and Equipment, Net

 14,561

 14,174

Other Real Estate and Repossessed Assets, Net

 207

 180

Goodwill

9,297

9,297

Other Intangible Assets, Net

179

166

Other Assets

                21,690

                17,834

      Total Assets

$1,380,139

$1,373,920

LIABILITIES          

Deposits:            

  Demand

$       167,768

$       151,847

  Regular Savings, N.O.W. & Money Market Deposit Accounts

634,195

646,544

  Time Deposits of $100,000 or More

 64,177

 65,585

  Other Time Deposits

           171,527

            182,640

      Total Deposits

    1,037,667

    1,046,616

Short-Term Borrowings:

  Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

46,402

39,515

  Other Short-Term Borrowings

 1,065

 1,421

Federal Home Loan Bank Advances

157,500

150,000

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts

15,000

15,000

Other Liabilities

                 14,265

                 15,503

      Total Liabilities

     1,271,899

     1,268,055

SHAREHOLDERS’ EQUITY

Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized

---

---

Common Stock, $1 Par Value; 20,000,000 Shares Authorized

   (13,086,119 Shares Issued at June 30, 2004 and December 31, 2003)

13,086

13,086

Surplus

114,088

113,335

Undivided Profits

29,454

24,303

Unallocated ESOP Shares (100,159 Shares at June 30, 2004

    and 117,964 Shares at December 31, 2003)

(1,502)

(1,769)

Accumulated Other Comprehensive (Loss) Income

 (2,026)

 1,084

Treasury Stock, at Cost (3,161,074 Shares at June 30,    

  2004 and 3,189,550 Shares at December 31, 2003)

              (44,860)

             (44,174)

      Total Shareholders’ Equity

            108,240

           105,865

      Total Liabilities and Shareholders’ Equity

$1,380,139

$1,373,920

Three Months      

Six Months     

Ended June 30,  

Ended June 30,  

2004

2003

2004

2003

INTEREST AND DIVIDEND INCOME

Interest and Fees on Loans

$12,523

$13,863

$25,278

$27,784

Interest on Federal Funds Sold

 42

 16

62

45

Interest and Dividends on Securities Available-for-Sale

3,491

2,973

7,038

6,285

Interest on Securities Held-to-Maturity

          1,006

                  859

          1,986

          1,692

Total Interest and Dividend Income

     17,062

     17,711

     34,364

     35,806

INTEREST EXPENSE   

Interest on Deposits:

Time Deposits of $100,000 or More

 345

 501

  699

  922

Other Deposits

2,671

3,084

 5,396

 6,363

Interest on Short-Term Borrowings:  

Federal Funds Purchased and Securities Sold   

Under Agreements to Repurchase

 69

 91

124

191

Other Short-Term Borrowings

        2

        2

        4

        3

Federal Home Loan Bank Advances

    1,580

    1,715

    3,158

    3,421

Junior Subordinated Obligations Issued to Unconsolidated

   Subsidiary Trusts

284

---

568

---

Guaranteed Preferred Beneficial Interests in

   Corporation’s Junior Subordinated Debentures

                       ---

                 119

                         ---

                  238

Total Interest Expense

         4,951

         5,512

            9,949

      11,138

NET INTEREST INCOME

12,111

12,199

24,415

24,668

Provision for Loan Losses

                 254

                 405

                  539

                  810

NET INTEREST INCOME AFTER

  PROVISION FOR LOAN LOSSES

     11,857

     11,794

      23,876

      23,858

OTHER INCOME

Income from Fiduciary Activities

1,060

927

2,116

1,794

Fees for Other Services to Customers

1,910

1,708

3,595

3,325

Net Gains on Securities Transactions

---

141

210

509

Other Operating Income

                 165

                 480

                  438

                  659

Total Other Income

         3,135

         3,256

          6,359

          6,287

OTHER EXPENSE  

Salaries and Employee Benefits

4,778

4,676

9,583

9,426

Occupancy Expense of Premises, Net

699

628

1,394

1,267

Furniture and Equipment Expense

695

746

1,389

1,417

Other Operating Expense

        2,001

        2,013

           3,933

           3,968

Total Other Expense

        8,173

        8,063

     16,299

     16,078

INCOME BEFORE PROVISION FOR INCOME TAXES

6,819

6,987

13,936

14,067

Provision for Income Taxes

        2,121

        2,232

          4,373

          4,506

NET INCOME

$    4,698

$    4,755

 $     9,563

 $     9,561

Average Shares Outstanding:

  Basic

9,828

9,881

9,825

9,888

  Diluted

10,057

10,112

10,056

10,105

Per Common Share:   

  Basic Earnings

$    .48

$    .48

$    .97

$    .97

  Diluted Earnings

    .47

    .47

  .95

  .95

Shares

Issued

Common

Stock

Surplus

Undivided

Profits

Unallo-

cated

ESOP

Shares

Accumulated

Other Com-

prehensive

(Loss)

 Income

Treasury

Stock

Total

Balance at December 31, 2003

13,086,119

$13,086

$113,335

$24,303

$(1,769)

$ 1,084

$(44,174)

$105,865

Comprehensive Income, Net of Tax:

  Net Income

---

---

---

9,563

---

---

---

     9,563

  Increase in Additional Pension

    Liability Over Unrecognized

    Prior Service Cost (Pre-tax $40)

(24)

(24)

  Net Unrealized Securities Holding

    Losses Arising During the Period,

    Net of Tax (Pre-tax $4,923)

---

---

---

---

---

(2,960)

---

(2,960)

  Reclassification Adjustment for

    Net Securities Gains Included in

    Net Income, Net of Tax

    (Pre-tax $210)

---

---

---

---

---

  (126)

---

              (126)

      Other Comprehensive Loss

        (3,110)

        Comprehensive Income

          6,453

Cash Dividends Declared,

  $.45 per Share

---

---

---

(4,412)

---

---

---

(4,412)

Stock Options Exercised

  (58,386 Shares)

---

---

 106

---

---

---

467

573

Shares Issued Under the Employee

  Stock Purchase Plan (11,997

  Shares)

---

---

206

---

---

---

97

303

Shares Issued Under the Directors’

  Stock Plan (1,171 Shares)

---

---

26

---

---

---

10

36

Tax Benefit for Disposition of

  Stock Options

---

---

158

---

---

---

---

158

Allocation of ESOP Stock

  (17,805 Shares)

---

---

257

---

267

---

---

524

Purchase of Treasury Stock

  (43,078 Shares)

                         ---

                ---

                    ---

                ---

              ---

              ---

      (1,260)

         (1,260)

Balance at June 30, 2004

13,086,119

$13,086

$114,088

$29,454

$(1,502)

$(2,026)

$(44,860)

$108,240

Accumulated

Unallo-

Other Com-

cated

prehensive

Shares

Common

Undivided

ESOP

(Loss)

Treasury

Issued

Stock

Surplus

Profits

Shares

 Income

Stock

Total

Balance at December 31, 2002

10,468,895

$10,469

$115,110

$13,611

$(1,822)

$ 3,253

$(39,219)

$101,402

Comprehensive Income, Net of Tax:

  Net Income

---

---

---

9,561

---

---

---

     9,561

  Net Unrealized Securities Holding

    Losses Arising During the Period,

    Net of Tax (Pre-tax $900)

---

---

---

---

---

(541)

---

(541)

  Reclassification Adjustment for

    Net Securities Gains Included in

    Net Income, Net of Tax

    (Pre-tax $509)

---

---

---

---

---

   (306)

---

               (306)

      Other Comprehensive Loss

               (847)

        Comprehensive Income

           8,714

Cash Dividends Declared,

  $.41 per Share

---

---

---

(4,028)

---

---

---

(4,028)

Stock Options Exercised

  (41,493 Shares)

---

---

260

---

---

---

294

554

Shares Issued Under the Directors’

  Stock Plan (1,100 Shares)

---

---

21

---

---

---

8

29

Shares Issued Under the Employee

  Stock Purchase Plan (14,374

  Shares)

---

---

193

---

---

---

104

297

Tax Benefit for Disposition of

  Stock Options

---

---

43

---

---

---

---

43

Purchase of Treasury Stock

  (97,760 Shares)

                         ---

                ---

                   ---

                ---

              ---

               ---

       (2,322)

         (2,322)

Balance at June 30, 2003

10,468,895

$10,469

$115,627

$19,144

$(1,822)

$ 2,406

$(41,135)

$104,689